A micro view of the credit crisis…

Posted by David A. Peterson on 14. January 2009 in Economics |

We have been hearing for weeks about the lack of credit available in the marketplace. Most of us don’t notice this type of problem on a week by week basis.  In fact the only time you would notice is if some major purchase was about to occur.


You may be thinking “credit crisis, what credit crisis?” “It hasn’t affected me.” For the most part you are right the credit crisis hasn’t affected you. To make matters a little less concerning if you have a good credit rating and a job then you might not notice this problem at all.


The only way most of us not making a major purchase would have noticed is the lack of credit card offers coming in the mail. This may be the only silver lining of the whole economic mess – less junk mail.


Here is another deceiving look at the credit crisis; how is it that the housing refinance business is hot right now? Lots of people are being given the chance to restructure their current housing note. If you have tried to refinance and you can’t due to your credit rating then you are learning first hand what the credit crisis means to you and to the economy as a whole.


To you it means that your housing payment will remain at a higher rate than normal. In normal times you would have probably been able to shave a point or two off your current note. That 1 or 2 point shaving of your interest rate can add up to hundreds of dollars a month. That new found money, had you been able to get the new note, may have been enough to help you finance a new car.


There is the issue first hand. In our modern economy all of our purchasing decisions are interconnected. If you can’t finance your new home, refinance your old dwelling, or if you can’t buy furniture, put in a pool, or even put on a much needed roof due to the lack of credit then you are actually contributing to the economic recession. It’s that trickle down effect that liberals are always blasting as voodoo economics.


How many times over the past 20 years have we heard that “trickle down” economics will not work? I would guess at least 1,000 times a year we are hearing on our favorite cable networks or reading in our favorite newspapers how conservatives are destroying our way of life by focusing on supply side economics.


Here we are in a real life demonstration of why demand side economics can fail. People need to buy cars. Notice I didn’t say people want to buy cars they actually need to buy cars. There is a demand.


Mike Jackson, the CEO of AutoNation, was on CNBC yesterday putting the credit crisis into perspective. He said that last year GMAC was financing upwards of 1,600 credit applications a month. Last month he said they did 6! Out of approximately 1,000 applications submitted in December only 6 (not six hundred – six, as in one less than 7) applications were accepted and cars rolled off the lot. His best quote was “… The General Motors Acceptance Corporation should actually be called the General Motors Rejection Corporation…”


Here’s a CEO that employees 25,000 people and has untold millions of dollars tied up in inventory and he can’t even move a car unless he reaches into his own pocket and creates the financing himself. I’m not sure how many friends he can finance before even he runs out of money.


Let’s face it most people can’t buy a $30,000 car by writing a check, how about $15,000 pool? A $5,000 air conditioning system for your home? A $2,500 fence? A $1,500 engagement ring?  A $250 business trip? At what point in your own life do you use some form of credit?


What if that credit is not available? Heck some people can’t even get divorced right now due to the credit crisis.


Regardless if you are a TARP advocate, or a promoter of libertarian ideas, you have to understand that supply side economics ultimately ends up affecting the little guy in a positive manner. The little guy is the economy. The little guy gives us the micro economic view of the economy. The little guy through his purchasing power allows all of the other little guys to stay employed.


We are all little guys. Rich, poor, under-employed, unemployed – we all buy the things that employ our fellow workers.


Bubbles occur when too much buying is going on at one time. We all saw it. The Federal Reserve purposely kept interest rates low while we all saw the explosion in housing values. The Federal Reserves task may be to control the national inflation rate but shouldn’t the Fed have recognized what the housing industry’s affect on the economy would be? Were we not seeing incredible housing inflation?


The government as a whole was so incensed at keeping job growth moving north that if failed to notice the bubble. That’s too polite – our elected officials ignored the housing bubble. Instead of sub-prime lending maybe a few interest rate increases would have been a better idea. I mean really – the housing inflation was clearly visible, and I am not even an economist.


What really happened was the Republican government was pummeled into creating more jobs at all cost. They were browbeaten, and verbally abused for years. The Democratic leaders and the liberal media would not let up. To the Democrats any job that is lost is the result of the federal government.


So our elected leaders, both Republican and Democrat did what was expected. They held hearings, passed laws, amendments, and allowed loose regulation to ensure that anyone that wanted a car, a pool, an air conditioning system, etc could walk right out and get one. Not to mention anyone that wanted to buy a house didn’t even need an income.


Hindsight is easy. It is easy for me to dissect the problem from behind my laptop. But how do we move forward and get out of this mess? Ultimately the little guy has to start buying again. The little guy makes up 70% of the national economy.


Supply side economics means that if enough resources are available at the top then large corporations, small S Corps, Limited Partnerships, and Sole Proprietors will have the resources to invest in their businesses and eventually hire additional workers. The newly hired workers will then do their part and buy the necessities of life – houses, cars, pools, air conditioners, fences, and engagement rings that will ultimately stimulate our national economy.


That is the micro view – the only way to move forward is to give businesses the resources to invest in their respective entities. This investment is ultimately called – job creation. These individuals with jobs will move the economy forward all by themselves.

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